Task Team of FUNDAMENTAL ACCOUNTING School of Business. Sun Yat-sen U L Notes Lesson 14 Managerial Accounting: Applications Learning objectives nsibility accounting system 2. Explain the main aspects of Cost-volume-profit analysis 3. Analyze budgeting and budgetary control 4. Describe standard costs and variance analysis 5. Explain the use of managerial accounting in decision making Students major in accountin Other students 6 hours Teaching contents Let's look at the XYz Company example. a manager at XYZ Company wants to replace an hine with a new. more efficient machine Annual variable expenses 800000 Expected life old machine. 720000 Remaining book value Annual variable expenses 1000000 XYZs sales are $2000000 per year. Fixed expenses, other than amortization, are $700000 per year. Should the manager purchase the new machine? The manager recommends that the company not purchase the new machine since disposal of the old machine would result in a loss Remaining book value 600000 Disposal value 150000 Loss from disposa 450000 (1) Is it correct? After learning this chapter, you will know how to employ the tools of managerial accounting and make decisions correctly Segmented Reporting and Responsibility Accounting Syster Segmented Reporting Organizations may break down their operations into various segments, such as divisions, stores, services, or departments. Thus, management needs reports on each valuation Segments may be evaluated as a cost centre, a profit centre, where profit centre reports
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Lesson Notes Lesson 14 Managerial Accounting: Applications Learning objectives 1. Describe segmented reporting and responsibility accounting system 2. Explain the main aspects of Cost-volume-profit analysis 3. Analyze budgeting and budgetary control 4. Describe standard costs and variance analysis 5. Explain the use of managerial accounting in decision making Teaching hours Students major in accounting 0 hours Other students 6 hours Teaching contents Introduction Let’s look at the XYZ Company example. A manager at XYZ Company wants to replace an old machine with a new, more efficient machine. New machine: List price 900000 Annual variable expenses 800000 Expected life in years 5 Old machine: Original cost 720000 Remaining book value 600000 Disposal value now 150000 Annual variable expenses 1000000 Remaining life in years 5 XYZ’s sales are $2000000 per year. Fixed expenses, other than amortization, are $700000 per year. Should the manager purchase the new machine? The manager recommends that the company not purchase the new machine since disposal of the old machine would result in a loss: Remaining book value 600000 Disposal value -150000 Loss from disposal 450000 （1）Is it correct? （2）What’s your comment to the manager’s decision? After learning this chapter, you will know how to employ the tools of managerial accounting and make decisions correctly. Segmented Reporting and Responsibility Accounting Systems Segmented Reporting Organizations may break down their operations into various segments, such as divisions, stores, services, or departments. Thus, management needs reports on each segment for cost management and performance evaluation. Segments may be evaluated as a cost centre, a profit centre, where profit centre reports
Task Team of FUNDAMENTAL ACCOUNTING School of Business. Sun Yat-sen University include information on a segments revenues and costs, and an investment centre. Some costs are direct and some are indirect, and indirect costs may be allocated to various departments. Service department costs are shared indirect expenses of operation departments They may be allocated using a variety of bases. Please refer to the following table Service Department Common Allocation Bases General Office Number of employees Personnel Number of employees Payroll Num ber of employees Advertising Sales Number of Purchase Purchasing Orders Cleaning Floor space occupied Maintenance Floor space occupied Responsibility Accounting System Responsibility accounting system is an accounting system which assigns managers the responsibility for costs and expenses under their control Responsibility accounting budgets are prepared prior to each accounting period Responsibility accounting performance reports compare actual costs and expenses to budgeted CVP analysis is used to answer the questions such as(1) How much must I sell to earn my desired income?(2) How will income be affected if I reduce selling prices to increase sales olume?(3) How will income be affected if I change the sales mix of my products? The basic assumptions of CVP analysis is that CVP analysis assumes relations can be expressed as straight lines within the relevant range, which means that unit selling price remains constant, unit variable costs remain constant, and total fixed cost remain constant. If the expected cost and revenue behaviour is different from the assumptions, then the results of CVP analysis are of limited use The objective of the cost analysis is determination of total fixed cost and the variable unit cost. The basic methods to estimate the total costs equation include: (1)scatter diagram;(2) high-low method; and (3)least-squares regression. Here least-squares ssion is usually covered in advanced cost accounting courses. It is commonly used with computer software because of the large number of calculations required Break-evenAnalysis The break-even point is the unique sales level at which a company neither earns a profit nor incurs a loss. The break-even point may be expressed in units or in dollars of sales Fixed costs Break-even point in units Contribution margin per unit Fixed costs Break-even point in dollars contribution margin ratio
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University include information on a segment’s revenues and costs, and an investment centre. Some costs are direct and some are indirect, and indirect costs may be allocated to various departments. Service department costs are shared indirect expenses of operation departments. They may be allocated using a variety of bases. Please refer to the following table: Service Department Common Allocation Bases General Office Number of employees Personnel Number of employees Payroll Number of employees Advertising Sales Purchasing Number of Purchase Orders Cleaning Floor space occupied Maintenance Floor space occupied Responsibility Accounting System Responsibility accounting system is an accounting system which assigns managers the responsibility for costs and expenses under their control. Responsibility accounting budgets are prepared prior to each accounting period. Responsibility accounting performance reports compare actual costs and expenses to budgeted amounts Cost-volume-profit Analysis CVP analysis is used to answer the questions such as (1) How much must I sell to earn my desired income? (2) How will income be affected if I reduce selling prices to increase sales volume? (3) How will income be affected if I change the sales mix of my products?.... The basic assumptions of CVP analysis is that CVP analysis assumes relations can be expressed as straight lines within the relevant range, which means that unit selling price remains constant, unit variable costs remain constant, and total fixed cost remain constant. If the expected cost and revenue behaviour is different from the assumptions, then the results of CVP analysis are of limited use. The objective of the cost analysis is determination of total fixed cost and the variable unit cost. The basic methods to estimate the total costs equation include: (1) scatter diagram; (2) high-low method; and (3) least-squares regression. Here least-squares regression is usually covered in advanced cost accounting courses. It is commonly used with computer software because of the large number of calculations required. Break-even Analysis The break-even point is the unique sales level at which a company neither earns a profit nor incurs a loss. The break-even point may be expressed in units or in dollars of sales. Break-even point in units = Contribution margin per unit Fixed Costs Break-even point in dollars = Contribution margin ratio Fixed Costs
Task Team of FUNDAMENTAL ACCOUNTING School of Business. Sun Yat-sen University Computing Income from Expected sales The income given a predicted level of sales can be computed as follows Pre-tax Income Sales-[Fixed costs+ Variable costs Pre-tax Income= Sales-Fixed costs- Variable costs Sales Volume Needed to earn a Target Income Break-even formulas can be adjusted to show the sales volume needed to earn any amount of income Fixed costs+ Target income Unit sales Contribution margin per unit Fixed costs+ Target income Dollar sales Contribution margin ratio Margin of Safety Margin of safety is used to estimate how much sales can decrease befo
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Computing Income from Expected Sales The income given a predicted level of sales can be computed as follows: Sales Volume Needed to Earn a Target Income Break-even formulas can be adjusted to show the sales volume needed to earn any amount of income. Margin of Safety Margin of safety is used to estimate how much sales can decrease before the company incurs a loss? = Sales – [Fixed costs + Variable costs] Pre-tax Income = Sales –Fixed costs - Variable costs or Pre-tax Income Income Contribution margin ratio Contribution margin per unit Unit sales = Fixed costs + Target income Dollar sales = Fixed costs + Target income
Task Team of FUNDAMENTAL ACCOUNTING School of Business. Sun Yat-sen University Margin of Expected sales-Break-even sales safety, percent Expected sales Sensitivity Analysis Sensitivity analysis is used to estimate the effects of changes in variables such as sales price, variable costs, and fixed costs. CVP analysis can be used to show the effects of such changes New fixed costs break-even point in dollars New contribution margin ratio Budgeting and Budgetary Control Budgets Budgets are formal statements of a company's plans expressed in monetary terms, hich attempt to capture the future activities of an organization. They are used by businesses, not-for-profit, government, educational, and other types of organizations. The importance of budgeting include (l)defines goals and objectives; (2)promotes analysis and a focus on the future;(3) motivates employees;(4) provides a basis for evaluating erformance, (5)coordinates business activities; (6) communicates plans and instructions Budget Committee consists of managers from all departments of the organization. It provides central guidance to insure that individual budgets submitted from all departments are realistic and coordinated. Flow of budget data is a bottom-up process Budget horizons are usually for one year, but may extend for several years. The annual operating budget may be divided into quarterly or monthly budgets Rolling budgets mean that the budget may be a twelve-month budget that rolls forward on month as the current month is completed Master Budget Master budget is a formal, comprehensive plan for the future of a It consists of several budgets linked together to form a coordinated plan for the organization
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Sensitivity Analysis Sensitivity analysis is used to estimate the effects of changes in variables such as sales price, variable costs, and fixed costs. CVP analysis can be used to show the effects of such changes. Budgeting and Budgetary Control Budgets Budgets are formal statements of a company’s plans expressed in monetary terms, which attempt to capture the future activities of an organization. They are used by businesses, not-for-profit, government, educational, and other types of organizations. The importance of budgeting include (1) defines goals and objectives; (2) promotes analysis and a focus on the future; (3) motivates employees; (4) provides a basis for evaluating performance; (5) coordinates business activities; (6) communicates plans and instructions. Budget Committee consists of managers from all departments of the organization. It provides central guidance to insure that individual budgets submitted from all departments are realistic and coordinated. Flow of budget data is a bottom-up process. Budget horizons are usually for one year, but may extend for several years. The annual operating budget may be divided into quarterly or monthly budgets. Rolling budgets mean that the budget may be a twelve-month budget that rolls forward one month as the current month is completed. Master Budget Master budget is a formal, comprehensive plan for the future of a company. It consists of several budgets linked together to form a coordinated plan for the organization. Expected sales Margin of safety, percent Expected sales - Break-even sales = New contribution margin ratio New break-even point in dollars New fixed costs =
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Prepare Prepare manufacturing sales production budgets Prepare Prepare Prepare financial capital selling and budgets expenditure administrative Sales Budget Sales budget is the starting point in the budgeting process. Most of the other gets are linked to the sales budget. Sales personnel are often involved in developing the sales Sales Budget Estimated Estimated Unit Price Unit Sales Analysis of economic and market conditions Forecasts of customer needs from marketing personnel Merchandise Purchases Budget Merchandise purchases budget provides detailed information about the purchases necessary to fulfill the sales budget and provide adequate Inventories Budgeted Budgeted inventory to sales for the beginning be purchased inventory period inventory The quantity purchased is affected by: (1) Just-in-time inventory systems, which enable purchases of smaller, frequently delivered quantities; (2)Safety stock inventory systems, which rovide protection against lost sales caused by delays in supplier shipments Selling Expense Budget Selling expense budget lists the types and amounts of selling
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Sales Budget Sales budget is the starting point in the budgeting process. Most of the other budgets are linked to the sales budget. Sales personnel are often involved in developing the sales budgets. Merchandise Purchases Budget Merchandise purchases budget provides detailed information about the purchases necessary to fulfill the sales budget and provide adequate inventories. The quantity purchased is affected by: (1) Just-in-time inventory systems, which enable purchases of smaller, frequently delivered quantities; (2) Safety stock inventory systems, which provide protection against lost sales caused by delays in supplier shipments. Selling Expense Budget Selling expense budget lists the types and amounts of selling Prepare sales budget Develop production budget Prepare financial budgets Prepare capital expenditure budget Prepare selling and general administrative budgets Prepare manufacturing budgets Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel Merchandise inventory to be purchased Budgeted ending inventory Budgeted sales for the period Budgeted beginning inventory = + _